Passporting after Brexit

The idea

That the UK Government should pay into the EU budget (post-Brexit) in exchange for the continuation of the right enjoyed by British banks to operate unencumbered throughout the European Union.

Why it makes sense

As home to the world’s largest financial centre, the City of London, the financial services industry accounts for 10% of the UK’s national output, and it is estimated that £27 billion of the UK banking sector’s annual revenue is tied to the ability of London-based banks to operate throughout the EU. The prospect of losing their coveted Passporting rights has already spooked a number of City banks into exploring contingency plans that could result in moving operations out of the Square Mile – taking vital tax revenues with them.

But it’s not all about Britain: European businesses and governments benefit greatly from their unrestricted access to the City’s highly-liquid capital markets and deep pool of investors and expertise. If Europe were to be cut off from its primary financial centre, negative consequences would be felt not just in the UK, but throughout the continent. In fact, the ant-Brexit Governor of the Bank of England, Mark Carney, has suggested that “there are greater short term risks on the continent in the [Brexit] transition than there are in the UK”.

Could it happen?

Financial Passporting is a privilege that comes with membership of the EEA (an economic club that the UK is set to leave), and the European institutions have made it clear that they will not allow the UK cherry-pick economic benefits a la carte. The EU appears to be ready to play hardball with the UK in the Brexit negotiations, and the denial of financial passporting would be interpreted as a significant punishment by the remaining 27 EU states – and thus a warning to any other countries that could be contemplating a move away from the bloc.

It’s also clear that a number of continental cities, like Frankfurt and Paris, view London’s loss of financial passporting as an opportunity to attract business away from the City. It seems unlikely that the French and German governments would surrender this opportunity to gain a comparative advantage over their British counterparts – and even if they did, the price demanded might be too high for British eurosceptics to stomach.

Politics, however, could be trumped by economics. While the EU institutions might be set on punishing the UK for leaving the union, individual member states are likely to be reluctant to severe ties with Europe’s largest financial centre. The UK could (and to some degree already has) also threaten to re-model its economy into a low-tax haven with minimal regulation. It could be in the interest of both the UK and the remaining 27 EU states to strike a deal that would allow London to keep its passporting rights on the grounds that it maintains its current regulatory framework.